In this paper we integrate heterogeneous inflation expectations into a simple monetary
model. Guided by empirical evidence we assume that boundedly rational agents, selecting
between extrapolative and regressive forecasting rules to predict the future inflation rate,
prefer rules that have produced low prediction errors in the past. We show that integrating
this behavioral expectation formation process into the monetary model leads to the
possibility of endogenous macroeconomic dynamics. For instance, our model replicates
certain empirical regularities such as irregular growth cycles or inflation persistence.
Moreover, we observe multi-stability via a Chenciner bifurcation.
The paper enlightens popular part of the budget policy – deficit finance. In the
process of securing economic conditions to surpass the current economic crises,
the governments all over the world incline towards debt deficit finance. The
intention is to describe the implications such as multiplier effect, crowding out
effect, correlation between budget and trade deficit. One of them are positive, they
increase the aggregate demand and national income, other negative in term that
they crowd out the private sector from the capital market under increased demand
for loanable funds.